Imputed income can be a tricky topic for many, but the basics are actually fairly straightforward. Essentially, when an individual’s income is above the threshold for a specific tax bracket, but they don’t have enough deductions to fully offset that income, the difference is called imputed income.
For example, if a person makes $1,500 before taxes in a month, but only has a $100 deduction to offset that amount, then the government will consider that person to be earning $1,400 in income. This is the case because both the $1,400 and $100 would be considered taxable income.
What is imputed income?
Understanding imputed income meaning can be confusing for some people who may bring up concerns like “Why should I owe tax on money I never saw?” This concern misses the mark because all taxes are owed by law. When someone does not have enough deductions to offset their entire income during a year or over many years, they are then obligated to pay taxes on the amount that was taxed at higher rates.
This means that, while it may seem like some people are unable to make progress in reducing their taxable income below their standard deduction threshold, they should still claim every deduction possible and simply expect to pay more in taxes each year as a result of those deductions. Eventually, deducting at least some amount from one’s taxable income will create a break-even point and ensure the individual owes less in taxes on future years.
Understanding imputed income is essential to make sound financial decisions, and it’s also highly relevant in situations like lending money to family. It’s the value of employee benefits and other inputs that are provided by the employer. An example of this would be Free or Reduced Meals for lower-income families.
Those are just a few examples, but imputed income can encompass many other areas for both the employer and employee. To find out the amount you’re receiving, you’ll have to ask what counts as imputed income for your employer, or look on your pay stub for a breakdown of what your employer includes in their calculation of the amount in this category.
As an employer, one of the easiest ways to create your pay stubs is an online check stub maker.
Income imputed examples
If you’re not sure what imputed income meaning is or whether the fringe benefits you provide to your employees must be taxed, here’s a list of common examples:
- Group term life insurance having a face value more than $50,000
- Use of a car for personal purposes
- More than $5,250 in educational support
- Reimbursement of non-deductible moving expenses
- Employee discounts that are greater than the tax-free amount
- A gym membership is one example of a fitness incentive.
- Adoption aid in excess of the tax-free amount
- Dependent care aid in excess of the tax-free threshold
Exclusion examples
There are also a number of advantages that are not required to be reported as income. Others, such as dependent care and adoption assistance, are initially exempt unless they exceed the tax-free levels specified.
Most omitted benefits are not subject to federal income tax withholding, social security, Medicare, Federal Unemployment Tax Act ( FUTA), or Railroad Retirement Tax Act (RRTA) taxes, and thus are not required to be reported on Form W-2.
Among these exclusions are:
- Accident and health insurance
- Accounts for medical expenses
- Meals Group term life insurance with a maximum payout of $50,000
- Employee discounts are available up to the tax-free amount.
- Adoption help up to the tax-free amount
- Assistance with dependent care up to the tax-free amount
- Employer-provided cell phones that are mostly used for work Education help of up to $5,250
Understanding imputation
Understanding imputed income is an important step towards saving for retirement and understanding the tax implications of various benefits offered by employers today, so make sure you’re aware!
Imputed income can be a bit confusing, but it is important to understand what it means. Income that is not actually received or taken as a paycheck is called imputed income. An example of this type of income would be when an employee does work over the summer and is not compensated for it until the next year.
The IRS has strict guidelines on the information that needs to be reported on pay stubs, and imputed income information is no exception. Imputed income is listed at the bottom of the W-2 form as compensation subject to federal income tax. This number will be different from the total wages listed earlier in the document, and will be included in the total taxes line of the form for a more specific breakdown. The amount of the imputed income can vary depending on how much time was put in during different periods throughout the year. It can also depend on which state you live in, as some states have different laws about what needs to be included while making your pay stub or making your invoice.
In many cases, employees are not compensated for this work until they are back at work and preparing their yearly paychecks for taxes, which can pose a problem in some situations if they make less than they should have. There are some situations where an employer might reimburse an employee for this work after it has been done, which would reduce their taxable income and leave less to be taxed at a later date.
Let’s say that someone works at Target and does some work on the side as a hair stylist on the weekends. Target would have to report that they have imputed income of $800 from this person’s part time job as a hair stylist. This is because there is extra income to be taxed off, and imputed income is a way to do so without tracking every dollar that comes in from everything you do for extra money.
Imputed income meaning from the ground
Since imputed income is not paid by an employer, it will not show up on an employee’s W-2 form, but will show up as “other income” or “non-taxable treatment” on a 1099-MISC form.
The Internal Revenue Service has strict rules about imputed income – and for that reason, it’s important to understand imputed income meaning from the ground up. This income usually only occurs in one of two situations. First, when a person voluntarily does work around their own home and does not charge them self for the work, or second when a person receives an inheritance. These are the only two situations in which imputed income can occur without violating the IRS rules.
For example, let’s say these rules apply to an individual who does home repairs out of their own house and does not charge themselves for it? In this case, they would need to account for this by adding the market value of the item they repaired onto their W-2 form as taxable employment wages. They would also need to report this money on their yearly taxes so that they could get a tax deduction on the repair job in question.
In either case, Imputed Income can be difficult to grasp at first glance for many people but it is important for taxpayers to be aware of it so they know what to do in these cases.
Calculating child support using imputed income
As previously indicated, you can apply imputed income to child support cases. In essence, the amount of child support that a person must pay depends on their imputed income. Child support is different from other situations in which imputed income is used (e.g., fringe benefits).
A judge may utilize imputed income in child custody disputes to estimate how much a person can afford to pay.
Say, for illustration, that a person is unable to pay a specific amount in child support because they are unemployed. Based on imputed income meaning, the court may set a lower child support payment amount.
Domestic partners may also get employee benefits in the form of imputed income (e.g., health insurance). These benefits must be disclosed on Form W-2.
Establishing imputed income and child support standards prevents people from purposefully remaining unemployed or working in low-wage jobs to reduce their child support obligations. These standards may differ from one state to the next.
Earned Income and Paychecks
You must deduct Social Security and Medicare taxes (FICA) from employees’ taxable wages.
Generally, no federal taxes must be withheld from imputed earnings. However, in some cases, imputed income is subject to federal income tax withholding.
Employees can choose to have federal income tax withheld from imputed pay. They can also pay the amount owed for federal income tax when they file their tax return.
Inform employees that there may be tax penalties if they do not withhold enough federal income tax on imputed income.
If you have any questions about imputed income tax withholding requirements or exemptions, please contact the IRS directly.
Imputed Income Reporting
Imputed income must be included on Form W-2 to accurately indicate an employee’s taxable wage-related income. Fill out Form W-2 for each employee who has imputed income. On Form W-2, enter imputed income in Box 12 using Code C. Include the imputed income amount in Boxes 1, 3, and 5.
Remember that imputed income meaning is usually exempt from federal income tax withholding. Imputed income, on the other hand, is subject to Social Security and Medicare tax withholding.
